Central Bank Depleted by Azeri Crisis as Oil Brings No Boostby
Rate increases, currency sales are failing to stabilize manat
Azerbaijan entering recession after two devaluations last year
The once-in-a-generation crash in oil prices sent the Azeri economy staggering into a crisis and the central bank is running out of options to stop the unraveling.
Every seventh lender is now shut, the currency is testing new lows and by one measure Azerbaijan’s international reserves are as thin as Ukraine’s. The central bank has little to fall back on after drawing more than two-thirds from its stockpile in the past 18 months and raising interest rates twice in less than three weeks to the highest since 2008. The manat, the world’s worst performer since February 2015 with a drop of more than 52 percent, may have to weaken as much as 10 percent soon, according to Danske Bank A/S and SEB AB.
What began as a shock to government revenue is snowballing after policy zigzags by a central bank that ruled out a devaluation only to devalue and said it relinquished control of its exchange rate only to remain in the currency market. While trying to wait out the collapse in commodity prices proved costly, not even a third week of gains in crude prices is bringing much relief. Oil will need to climb above $50 to steady the currency market, according to Samir Aliyev, an analyst at the Center for Economic Initiatives in Baku.
“The government needs to restore trust in the central bank and banks if it is to restore trust in the manat,” said Vuqar Bayramov, head of the Center for Economic and Social Development, a research group based in the Azeri capital Baku. “Sooner or later, the central bank will have to pull out of the market to stop the depletion of its currency reserves. It is difficult though to say exactly when.”
The manat has continued to slide even as recovering prices of raw materials buoyed the currencies of other commodity-exporting nations in the past week, from Russia to Australia and South Africa. The Azeri currency has racked up a 4.6 percent drop against the dollar this month, worse than all but one currency globally, according to data compiled by Bloomberg.
“There is a pent-up demand for hard currency,” said Per Hammarlund, the chief emerging-market strategist at SEB in Stockholm. “After all, they moved to a managed float only in December and with the banking sector in dire straits, people are probably trying to switch over as much as they can.”
The share of dollar deposits climbed to 85 percent in December, Fitch estimates.
All three major credit assessors have stripped Azerbaijan of its investment-grade rating this year as the crash in crude prices pushes the economy of the third-biggest oil producer in the former Soviet Union into a recession.
While Fitch isn’t currently forecasting further devaluation and expects reserves to recover by end-2016, the outlook is fraught with risks, according to Krisjanis Krustins, an analyst at the ratings company. Still, to prevent a sharp drop in the manat, the central bank has recourse to tools including foreign-currency auctions, interest rates and, “in a more extreme scenario, a revisiting of capital controls,” he said.
“There is considerable uncertainty surrounding the exchange rate,” Krustins said. Last week’s rate increase “highlights the fact that there are still pressures on the exchange rate, as does the further drop of reserves in February.”
As authorities tried to to cope with the fallout from collapsing oil prices, the central bank and the state oil fund have stepped in to provide lenders with dollars at auctions. While the central bank has sold no foreign currency this month after extending $367.5 million in February, the wealth fund, known as Sofaz, has already more than doubled its sales to $368 million in March.
“The state oil fund will bear the brunt if the government chooses to defend the manat,” said Aliyev at the Center for Economic Initiatives. “The central bank may also allow a soft devaluation of the manat to hold on to reserves.”
Foreign-currency auctions by the oil fund have allowed the central bank to avoid interventions this month, Namiq Aliyev, a spokesman for the regulator, said in an e-mailed response to questions. Sofaz offered $200 million on Friday, receiving bids from 25 banks for $68.4 million.
The wealth fund, which receives most of the government’s oil-linked revenue and uses transfers to finance the budget, had $33.6 billion in assets as of Jan. 1 after a 9.5 percent slide in 2015. Oxford Economics Ltd. estimated that central bank reserves provided barely three months of import cover at the end of January. The holdings declined another 8.5 percent to $4 billion in February.
The threat of a fiscal or balance-of-payments crisis in Azerbaijan is increasing, according to Patrick Dennis, an analyst at Oxford Economics in London.
“Clearly the situation has continued to deteriorate,” he said. “The main triggers for further concern are a renewed fall in the oil price or prolongation of the current price weakness.”